Vidéotron benefiting from low-priced telephony strategy: UBS

A new report from UBS Securities Canada indicates that the aggressive pricing approach Vidéotron ltée used to secure upwards of 225,000 telephony subscribers "didn’t leave money on the table." The investment house concludes that lower telephony pricing has positioned the Quebec-based cable company for revenue growth and margin expansion that wouldn’t have otherwise been possible with a strategy based on higher prices. UBS suggests that lower telephony pricing is more than offset by increased subscriber growth in telephony, video and Internet – a bundling strategy that is paying off for the cableco. "If Vidéotron had entered the market with a smaller discount, similar to Rogers Communications or Shaw Communications, we estimate that it would have sacrificed approximately $35 million of annual or approximately seven percentage points of EBIDTA growth heading into 2007," reads the report, Revisiting the Bundle Race. The report goes on to estimate that if Vidéotron had entered the market with a 12% discount to Bell Canada as opposed to its current 30% discount, telephony penetration for the company would be about 4% of homes passed one year after introducing service. This, notes UBS, would equate to approximately 60,000 fewer telephony subscribers than it had after one year of offering service. Vidéotron had 164,000 telephony subscribers at the end of year one. The strategy of aggressively discounting telephony has allowed Vidéotron to shield itself from the negative impact of a competitive response from Bell Canada – Vidéotron’s primary competitor in Quebec, indicates UBS. The investment house suggests that other cable operators could learn from Vidéotron’s playbook. "We believe faster phone and bundle penetration also minimizes the risks that arise for cable companies as local voice regulation on ILECs eases and as ILECs catch up on technology," writes UBS. "By speeding up telephone and bundle penetration, cable companies can effectively create a ‘wall’ around their subscribers." Not only did telephony allow the Quebec cable company to gain an important revenue stream, phone service helps to increase bundle penetration in its territory. At the end of the first quarter 2006, Vidéotron had approximately 45% of customers on either double- or triple-play bundles and that figure is expected to increase by another 25% in the next two years, according to UBS (see chart on page 1). The increasing bundle penetration, combined with the introduction of telephony services acts as a protection mechanism, or "wall" around Vidéotron subscribers against competitive responses from Bell: it’s unlikely a Vidéotron subscriber is going to drop a single service from a bundle of services to switch to a competitor.

Vidéotron benefiting from low-priced telephony strategy: UBS

News | July 24, 2006

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